Glenboden M & A Originations

Private equity player finds hidden value in minor Romanian dairy

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Origination Status company acquisition reported in local business press, August 2007;
Asset SC Covalact SA (Romania), small domestic dairy producer;
Buyer SigmaBleyzer (USA), region –specific private equity group;
Seller management and shareholders of Covalact;
Buyer Rationale part of strategy of investing in south-east Europe;
Seller Rationale acceptable valuation, access to capital;
NBs Covalact has only est. 1,5% market share in Romania, but est. 7% of Bucharest
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Why on earth would a US –based private equity firm acquire a small local dairy, with a tiny national market share, in a small town in the middle of Transylvania, and with a portfolio limited to commodity ‘white’ products, cheese and butter ? Either the valuation was very attractive, or they have a clear path to an exit route through re-sale later, or both. In any event, this deal reminds us that dairy is a reliable if not stellar sector for private equity to invest in.

One factor here is likely to be an attractive valuation. Sometimes dairies with modern production facilities, and a broad distribution network, run into liquidity problems – milk suppliers are impatient when it comes to getting paid, but modern retailers are not so hasty when it comes to paying the dairies.

In such cases the owners might accept a low valuation in order to get a capital injection, and in the case of Covalact they would be keeping 30% to hopefully get some upside later on.

However, if it’s true that the company is valued at € 10 mln, then this is quite a full number given Covalact’s stated processing capacity of 100k l. of milk per day (even if it’s working near full capacity). Add to that a product range which suggests old and /or basic equipment, and distribution that is largely within its own region (50% market share in Covasna), and the deal looks over-valued.

We can only assume, for SigmaBleyzer’s sake, that the € 10 mln includes capital that’s to be invested in the business. If so then the deal looks very different. There’s likely to be an opportunity in the Romanian market to invest in value-added dairy products, like PET drinking yoghurt or micro –filtered milk.

Alternatively Covalact could focus on building a market –leading white products portfolio, gradually easing away from hard cheese and butter. Covasna is reasonable close to the Romanian capital Bucharest, and already claims to have a 7% share of it; there might also be marketing opportunities in dairy products coming from ecologically –sound Transylvania.

So, Sigma is being either very smart, or the opposite of that, in making this investment. Although based in Texas, the group has an impressive array of locally –sourced team members, and offices in Sofia, Bucharest and Kiev, so they’re not short of local intelligence.

Their portfolio includes a 4% market share confectionery company in Ukraine, located close to the capital city Kiev. The Covalact deal mutatis mutandis follows the same pattern, although we believe there’s much better exit potential with a small dairy company than a small confectionery one, given current international M&A realities.

So, Sigma has either learnt from its confectionery experience, or has simply been luckier this time in finding a dairy opportunity. Another word of advice to them – have a strategic investor lined up even before you close the deal with Covalact’s owners. This might not be too difficult, especially considering strong activity on the part of e.g. the big French dairy groups in eastern Europe now.

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